VII. At the annual, or the half-yearly meeting, the directors announce the amount of the profits and the mode of their distribution.

The first appropriation of the profits is to pay to the shareholders a dividend on the capital. But all the profits are not usually thus appropriated; a certain portion is generally retained as a rest, or surplus fund, or, as it is sometimes called, a guarantee fund. This last title has led to an erroneous impression with regard to the nature and purposes of this fund. It is not designed as a guarantee to the depositors for the amount of their deposits - these are guaranteed by the paid-up capital and the liability of the shareholders - but as a guarantee to the shareholders for the uniformity of their dividends.1 Should the profits in any one year fall below the sum necessary to pay the usual dividend, the deficiency may then be taken from the surplus or guarantee fund. The amount of this fund, therefore, will be regulated by the amount of the transactions, and the consequent danger of loss. But it sometimes happens that, after paying a liberal dividend, the surplus fund accumulates far beyond the sum necessary for the above purpose. In this case a portion of the fund may be employed either in still farther increasing the dividend, or it may be distributed to the shareholders in the form of bonuses, or it may be added to the capital. The course to be adopted must depend upon circumstances. When the capital is small, it will probably be best to make an addition from the surplus fund; but when the capital is sufficiently large, the best way will be to give an occasional bonus to the proprietors. This is usually better than increasing the dividend. For if the dividend be once increased, the same rate of dividend will always be expected. And it is better not to make any advance, unless there is good reason to believe that the same rate will always be maintained.

1 The balance sheets of all banks registered under the Companies Acts must be certified by an auditor, who is appointed not by the directors, but by the shareholders.

Those persons are under a mistake who object to a reserved or surplus fund on the ground that it takes away the profits from the existing shareholders, and gives them to the future shareholders. This is not the fact. An existing shareholder who keeps his shares until the fund is in some way distributed, receives of course his portion of the fund. But an existing shareholder who sells out his shares before the fund is distributed receives the value of his portion of the fund in the price of his shares. The amount of the surplus fund will influence the market value of the shares.

1 See note on page 362.

"We consider it of high importance that a bank should maintain an ample surplus fund. Without such a fund the dividends will fluctuate very widely, and sometimes there may be no dividend at all, even though upon a series of years the bank may have been very successful. Even if it is known that a bank has met with losses, its credit is not so much affected when it has an ample reserved fund to fall back upon. And besides the ordinary losses in the way of business, a bank will sometimes, in a season of pressure, be called upon to sustain loss by the realization of securities; and it is very convenient to have a surplus fund sufficiently ample to bear all these contingencies. Such a fund too has a moral effect in strengthening the reputation of the bank in public estimation. It is regarded as an indication that its affairs are governed by a wise and prudent administration.

It will assist us in forming a correct judgment as to the principles on which joint-stock banks ought to be administered, if we take a view of those banks that have fallen, and notice the causes to which their failure may be assigned. In investigating these causes, we shall find that the disasters which have befallen joint-stock banks have arisen not from any unsoundness in the principles of joint-stock banking, but purely from mal-administration. It was predicted by their opponents that they would be ruined by the excessive issue of their notes; but the banks that have failed have been chiefly those that did not issue notes It was stated they would be ruined by carrying on an extensive business with a small capital; but among the banks that have stopped have been some of the largest capital. It was supposed they would be ruined by unprincipled men getting to be directors, who, having no property of their own, would care little about squandering the property of others. But the fallen banks are chiefly those which were governed by honourable men; and the greatest sufferers have been the directors. Nor can it be said that the joint-stock banks have made their losses by engaging in speculations unconnected with banking. Private bankers have done so. But joint-stock banks are confined by their deeds of settlement to the business of banking. Nor has it appeared - except, perhaps, in the Isle of Man Bank - that they have violated their deeds in this respect. To what, then, must we ascribe the failure of so many joint-stock banks? We reply, To maladministration; or, in other words, to bad management. And this leads us to inquire, In what way has this mal-administration been exemplified? What are those erroneous principles that have led to these fatal results? Without attempting to enumerate them all, we will endeavour to specify a few of the most prominent.

I. Taking the unsound business of other banks.

One cause of the rapid extension of joint-stock banks in 1836, was the "merging" of numerous private banks. It appears that 138 private banking establishments merged in joint-stock banks. Some of the private banks sold their business after the joint-stock banks had come into operation. Others formed a joint-stock bank upon the private bank, the senior partner often becoming a director, and the junior partner the manager, of the new bank.